The proposed for-profit conversion of CareFirst Blue Cross and Blue Shield, Maryland's largest health insurer, will enrich the company's top executives, weaken the state's healthcare system and leave many low-income residents without coverage, a new study suggests.
The 117-page report, released last week, provides new ammunition for Maryland legislators who oppose CareFirst's planned merger with Thousand Oaks, Calif.-based WellPoint Health Networks, one of the nation's largest publicly traded managed-care companies (Nov. 26, p. 8). Maryland House Speaker Casper Taylor Jr. and other lawmakers said last week they plan to thwart the $1.3 billion deal and force CareFirst to fulfill its charitable mission as a not-for-profit organization.
The conflict surrounding the CareFirst deal is the latest example of growing opposition to conversion announcements by Blues plans nationwide. Legislators and consumer groups recently have spoken out against conversion proposals by Blues plans in Maine, New York and several other states.
The report, commissioned by the Abell Foundation, a consumer watchdog group for the Baltimore area, cautions Maryland legislators against allowing CareFirst to abandon its oath to provide coverage for hard-to-insure individuals. That promise had helped the Owings Mills, Md.-based insurer win a host of tax breaks since its founding in the 1930s.
"The loss of Maryland's commitment to a system that protects the poor and otherwise uninsurable, while providing a predictable environment for the state's hospitals and insurance companies, would be an intolerable price to pay for CareFirst's corporate ambitions," according to the report, written by Carl Schramm, former head of the Johns Hopkins Center for Hospital Finance and Management.
Schramm's report also urged lawmakers to scrutinize how much CareFirst's executives would be compensated. Under the deal, CareFirst's chief executive officer, William Jews, would head up WellPoint's southeast division. In a recent conference call with reporters, Jews declined to discuss any personal deals he may have struck with WellPoint.
Jews earned $2 million last year as the head of not-for-profit CareFirst, according to documents the insurer filed with the state. By contrast, his counterpart at for-profit WellPoint, Leonard Schaeffer, earned $11.1 million and had stock options worth $64.6 million last year, the report said.
CareFirst has publicly dismissed the report, saying it is "rife with factual errors and misstatements." Company officials could not be reached for comment.
The company had declined to cooperate in the study, which was completed before the proposed merger with WellPoint was announced late last month. Securities and Exchange Commission regulations restricted what officials could discuss while in negotiations with a publicly traded company.
CareFirst has said that its plan to convert to for-profit status and merge with WellPoint would enhance its competitiveness by giving it greater operating efficiencies and a stronger financial position.
Indeed, a study released this year by research firm Conning & Co. found that for-profit Blues plans have generated an average profit margin of 2.5%, compared with 0.8% for Blues plans overall.
"There will likely be a knee-jerk reaction that the Blues are selling out to become for-profits, especially since they've historically been (not-for-profit)," said Samuel Levitt, author of the Conning study. "But the economic realities of healthcare leave them little choice. It's either sink or swim."
The Abell report, however, questions the motives behind CareFirst's decision to convert. It explains how in recent years CareFirst has built up cash reserves of almost $800 million while withdrawing from Medicaid and Medicare HMO programs, saying reimbursements were too low. It did so, the report suggests, to make itself more financially attractive for suitors such as WellPoint.
CareFirst has publicly challenged the implication that it has backed away from its historical role of being an insurer of last resort, saying it now provides services for more hard-to-insure individuals than ever.
The company will file a formal application with insurance commissioners in Maryland, Delaware and the District of Columbia before year-end to seek clearance for the merger.
If the transaction is approved, lawmakers should analyze the proposed purchase price, Schramm urged. Other not-for-profit insurers, his report said, have low-balled their values in bids to go public. WellPoint, for example, proposed a $100 million settlement when it sought to acquire Blue Cross of California in 1993. Three years later, the deal was struck for about $3 billion.
Under the proposed deal, consultants for Maryland, Delaware and the District of Columbia would determine how much CareFirst is worth-expected to be about $1.3 billion. That money would be split among the three jurisdictions to compensate for past tax advantages the insurer has enjoyed.
Maryland lawmakers expect their state to get the largest share because CareFirst does most of its business there. Still, some officials, including Maryland Attorney General Joseph Curran, question whether the money will be enough to compensate for the loss of the only Maryland-based not-for-profit health insurer.